March 2, 2015

TINA and the complacent belief in free lunches strip the resiliency from a system and leave it vulnerable to collapse.

It's tough to select three acronyms that best capture the current perfection of central planning, central banking and centralized propaganda. FUBAR (f**ked up beyond all repair) is tough to beat, and for those with a taste for absurdist humor, ROTFLMAO is equally appropriate--especially when "official" economic data is issued by various Ministries of Truth.

After long deliberation, I'm going with TINA, TANSTAAFL and FUGAZI as best defining our era: there is no alternative, there ain't no such thing as a free lunch, and f**ked up, got ambushed, zipped in (to a body bag).

Let's start with TINA, there is no alternative, because this drives the other two. TINA is the favored phrase of those benefiting from the current arrangement; if they can sell everyone on the idea that this is the only possible arrangement, the tax-donkeys and debt-serfs (i.e. the bottom 90%) will passively accept their lot in life and those at the top of the heap will have a free pass to most of the wealth and power.

But TINA also expresses a systemic rigidity that suppresses the variability and volatility needed to maintain real stability and not just a phony extend-and-pretend pseudo-stability.

As Nassim Taleb has shown in his work on fragility and anti-fragility (as described in his book Antifragile: Things That Gain from Disorder), there is no alternative is another way of guaranteeing rigidity, brittleness, fragility and vulnerability to collapse.

Here's one example of TINA--rising credit is the backbone of the status quo, and there is no alternative to ever-expanding levels of debt and ever-diminishing returns on all the newly acquired debt.

Which brings us to there ain't no such thing as a free lunch: if there is no alternative, i.e. there is no experimentation, dissent or innovation allowed, the system becomes increasingly fragile and implodes at the first crisis.

There ain't no such thing as a free lunch expresses three core dynamics in economics: everything has an opportunity cost; externalities are eventually paid by someone, somewhere, and every "investment" that claims to generate something for nothing is a Ponzi scheme or other fraud.

The opportunity cost of any expense is what else could have been bought with the money. If a society builds a bridge to nowhere at great expense, the society gave up all the more productive uses of those funds. If a university pays an administrator $350,000 a year to be Executive Director of Institutional Advancement (or some equivalent paper-shuffling nonsense), the students forfeit $350,000 of additional classroom educators or a reduction in tuition.

When the money is being borrowed or extracted from student debt-serfs, it seems as if the money is free; the opportunity cost is not visible. But over time, malinvestment, waste and corruption bleed the system of capital and vitality. A society of bridges to nowhere and overpaid, counterproductive paper-shufflers is a society poised on the precipice of collapse.

Externalities are costs that are dumped by participants onto the system or others in the system. The classic example is industrial waste dumped into the air and rivers.

Externalities such as pollution are interesting examples of the Tragedy of the Commons (U.S. Healthcare and the Tragedy of the Commons) that I discussed last month.

When we dump waste in the air and rivers, at first it seems as if the dumping is "free"--we avoid the cost of dealing with the pollutants, and the river and air absorb the poisons with little impact on the system as a whole.

But then as everyone else also dumps waste in the air and water--and they must do so, if they want to compete with those who are "lowering production costs" by dumping their contaminants--the entire system is soon clogged with pollutants that negatively everyone who breathes, eats food grown on poisoned soils, etc.

Since the waste has reached truly epic levels, the cost of remediating the damage is now staggering: the sources of pollution must clean up their production discharges (a horrendously costly project on a national scale) and the damage already done must be cleaned up--another project that will cost a significant percentage of the nation's GDP.

If the nation pretends to clean up the waste with toothless regulations and PR pronouncements, all in the name of maintaining production and consumption, the waste will only get more costly to clean up later.

In the meantime, everyone breathing the air rediscovers TANSTAAFL: there ain't no such thing as a free lunch. The illnesses caused by rampant environmental damaged deduct millions of years of productive life from the citizenry and rapidly increase healthcare costs. Both divert capital from production and bleed disposable income from consumption.

Putting off the $10 trillion in environmental cleanup creates $10 trillion in reduced lifespans, lower productivity and soaring healthcare costs--and eventually the $10 trillion clean-up will have to paid for anyway, lest the nation become unlivable.

Every pension plan based on 7+% annual returns is effectively a promise to take $10,000 in contributions and magically turn it into $250,000 in benefits. Every pay-as-you-go healthcare system for the elderly (Medicare etc.) makes the same promise: everyone who paid in $10,000 in total lifetime Medicare taxes can extract $300,000 to $500,000 in benefits.

The same goes for stock markets that triple in six years and housing prices that double in a few short years: the gains, pensions and healthcare are mostly free lunches.

And that brings us to FUGAZI (f**ked up, got ambushed, zipped in). FUGAZI has two current meanings, both apocryphal: something that is fake and the combat-context phrase f**ked up, got ambushed, zipped in (to a body bag, i.e. killed in action). While this certainly sounds Vietnam-era, I worked with many Vietnam vets in the 70s and 80s, and I never heard any use the word fugazi, so it may be a backronym, i.e. a word that did not start as an acronym but acquired an acronym later.

The official narrative of "growth" based on official statistics is fugazi, i.e. fake. The stats are fake, the rah-rah propaganda is fake, the claim that subprime auto loans will all be paid in full is fake, the promise that a college education will deliver a secure, good-paying job is fake--the list is essentially endless.

That leaves investors and anyone else who believes the official narrative (or believes the Powers That Be can enforce the narrative even if it is fake) in danger of getting ambushed by an imploding, bidless market. The big screwup is believing you're safe because nothing untoward has ever happened on this path. (In other words, "buy the dip" has worked every time and is thus totally safe.)

The point here is that TINA and the complacent belief in free lunches strip the resiliency from a system and leave it vulnerable to collapse. So instead of hyper-vigilance and a keen intuition for something not feeling right, the believers in free lunches march complacently down the trail, are ambushed by "the impossible" and zipped up in body bags.

Put another way: it's fun to play at a rigged roulette wheel, but once you feel confident that you'll never lose or will recover your losses quickly, it's wise to cash in your chips and let others play the last few spins of the wheel.